From October 1992 to December 2012, Don Coxe wrote the investment journal Basic Points exclusively for BMO Financial Group.

Overview:

Basic Points: “THE FINAL PROBLEM”

December 21, 2012

Overview:

In this final issue of Basic Points, we discuss what we consider The Final Problem for central banks, governments and investors in the industrial world.

Tragically, capitalism's greatest triumph and the powerful global economic expansion were interrupted by capitalism's greatest infamy. The Crash was caused primarily by the major banks of Wall Street and Europe that we have long labeled as the B5—The Big, Bad, Bonused, Bail-out Banks. A recession spread rapidly across the Industrial World, and panicky central banks and governments united to rescue collapsing banks, at enormous taxpayer cost. Interest rates were slashed near to zero during the crisis, when outright deflation loomed.

The ensuing recoveries have been so tepid that money continues to be astonishingly cheap for governments, and corporations—and, bizarrely, for banks. What we have called “The Financial Heroin” continues to flow into the veins of once-vibrant economies.

Meanwhile, the segments of the population still being punished for the bankers' sins are in the lower- and middle-classes, who have long relied on saving through banks and short-term instruments.

In this final issue, we cite Homer's description of a society in The Odyssey as we consider the question: When will it be possible to phase out their emergency economic and social support programs?

We discuss the likelihood that the sustained dependence of governments on zero interest rates and more-generous social benefits creates a self-sustaining system that pushes risk-taking and capitalism off to increasingly distant horizons.

In the short term, if a fiscal deal in Washington survives the demands of extremists in Congress and the White House, the US economy should continue with its modest growth. The towering deficits will continue, but the inevitable crisis will probably be pushed further down the road. Canada, with the best-managed banks and the soundest macro policies, will continue to grow moderately. In the eurozone, there are currently no alarm bells to drown out the Christmas bells, but economies remain weak and the PIIGS remain crisis-prone.

Our long-cycle view remains intact: Global economic leadership will continue to reside with the former socialist Asian economies that most enthusiastically embraced capitalism to emerge from poverty. We call their astonishing performance "The greatest efflorescence of personal economic liberty in history." Since these economies have far higher commodity content than the frail, senescent Western economies, commodity prices should remain firm.

Best wishes for the holiday season and next year. For those who wish to keep informed on our views, a new product offering will come shortly to those who express interest to us via our website.

Many thanks for your sustained, enthusiastic support over this long timespan. You have been truly wonderful!

Don Coxe

BMO Financial Group and BASIC POINTS

Basic Points is published exclusively for clients of BMO Financial Group.

For information about receiving a copy, please speak to your account representative.

Au Revoir But Not Goodbye

At year-end, we will conclude our arrangement as Strategy Advisor for BMO Financial Group, by publishing the December issue of Basic Points, and on Jan 3, 2013, making our last Client Conference Call for BMO Nesbitt Burns and BMO Capital Markets.

It has been a great run. We thank our amazingly loyal readers for giving us the platform to expound our views on history-based investing. We also thank BMO Financial Group for their support in promoting Basic Points and for letting us publish highly-personal commentary without interference.

When we first joined BMO, it was a big Canadian bank with an industry-leading private client division and a relatively modest external presence. Thanks to its prudent, client-centered management practices in a North American industry, which was dominated by imprudent, self-seeking managements, it is now a major North American financial institution with a growing global presence. We'd like to think we made a small contribution to that stellar performance.

We shall continue to deliver our investment recommendations in Conference Calls (and transcripts), with occasional essays on major themes. We hope to continue our relationships with our loyal fans, in a format that will increase our exposure across a far wider investment community.

We shall also continue to advise the Global Commodity Strategy team of our partner, BMO Global Asset Management, as they create commodity equity-based investment solutions for a wide range of clients.